NSW Treasurer demands federal reform

NSW’s Treasurer, Dominic Perrottet, has labelled federal-state financial relations “a mess” and demanded fundamental reform. From The SMH:

The NSW government has appointed an expert panel to review federal financial relations from a state perspective. It will identify ways to improve the current system and make it more reliable.

Mr Perrottet said the aim was to promote a more dynamic form of “bottom-up federalism” driven by the states. “In our three-tier federal system financial relations are a mess,” Mr Perrottet said…

Almost 40 per cent of NSW revenue currently comes from the Commonwealth’s coffers but a “complicated tangle” of financial arrangements makes it hard for states to plan effectively, Perrottet said… Mr Perrottet said federal funding arrangements have become “too complex and too restrictive”…

Hard to disagree.

The over-riding key to successful outcomes across the federation rests on eliminating waste and duplication across the various levels of government, along with fixing the vertical fiscal imbalances (VFI) embedded in the current federal system.

Australia’s federal system has created multiple areas of shared responsibility for key policy areas (e.g. health and education) across the state and federal governments:

ScreenHunter_7951 Jun. 24 10.03

As the saying goes, “when everyone is responsible, no one is responsible”, and the shared responsibility between the commonwealth and states across many areas of public policy is creating sub-optimal outcomes for taxpayers and the nation at large, creating incentives for buck passing, cost shifting, and lack of accountability, not to mention the inefficient use of resources via excessive duplication between the various levels of government (e.g. state and federal health departments and agencies).

Moreover, as the Commonwealth raises 82% of total tax revenue, the states and local governments are left heavily reliant on Commonwealth funding, as illustrated in the next chart:

ScreenHunter_7950 Jun. 24 10.00

Possible options for improving the operation of the federation include:

  • Consolidating existing Commonwealth payments to the states into a single untied funding stream to be spent on areas such as hospitals and schools. This option would not reduce VFI, but would improve accountability and minimise the blame game.
  • Increasing states’ access to tax revenue, for example by allowing states to raise their own income tax and/or expanding the GST.
  • Shifting more responsibilities to the Commonwealth (e.g. healthcare).

Without addressing VFIs, there can be no meaningful reforms to the federation. Rather, the state’s and feds will continue to pass the buck, cost-shift, and blame each other, leading to sub-optimal outcomes for Australian taxpayers.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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